LeapFrog 2004 Annual Report Download - page 88

LEAPFROG ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share and percent data)
liabilities are translated at period-end exchange rates and revenues and expenses are translated at the average of
the monthly exchange rates that were in effect during the year. The resulting translation adjustments are included
as a separate component of equity. Foreign currency transaction gains and losses are included in income as
incurred. In the year ended December 31, 2004, 2003 and 2002, respectively, transaction gain (loss) included in
other income totaled $31, $2,776 and $987, respectively. Beginning in January 2004 we implemented a foreign
exchange hedging program that is designed to minimize the impact of currency exchange rate movements on
remeasurable balance sheet items.
Derivative Financial Instruments
The Company transacts business in various foreign currencies, primarily in the British Pound, Canadian
Dollar and Euros. In order to protect itself against reductions in the value and volatility of future cash flows
caused by changes in currency exchange rates, the Company implemented a foreign exchange hedging program
for its transaction exposure on January 9, 2004. The program utilizes foreign exchange forward contracts to
hedge foreign currency exposures of underlying non-functional currency monetary assets and liabilities that are
subject to remeasurement. The exposures are generated primarily through intercompany sales in foreign
currencies. The hedging program reduces, but does not always eliminate, the impact of the remeasurement of
balance sheet items due to movements of currency exchange rates.
The Company does not use forward exchange hedging contracts for speculative or trading purposes. All
forward contracts are carried on the balance sheet as assets or liabilities and the contract’s corresponding gains
and losses are recognized immediately in earnings to offset the changes in fair value of the assets or liabilities
being hedged. These gains and losses are included in “Other income (expense), net” on the Statement of Income.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds.
Investments
Short-term investments consist primarily of auction rate municipal and preferred securities. Interest rates on
these securities reset at every auction date, generally every seven to forty nine days, depending on the security.
Although original maturities of these instruments are generally longer than one year, the Company has the right
to sell these securities each auction date.
Long-term investments consist of municipal bonds with greater than one-year maturities. At December 31,
2004, the Company had $3,737 in long-term investments, which are included in “Other assets” in our Balance
Sheet. At December 31, 2003, the Company had no long-term investments.
The Company classifies all investments as available-for-sale. Available-for-sale securities are carried at
estimated fair value, based on available market information, with unrealized gains and losses, if any, reported as
a component of stockholders’ equity. The cost of securities sold is based on the specific identification method.
Concentration of credit risk is managed by diversifying investments among a variety of high credit-quality
issuers.
Inventories
Inventories, net of an allowance for slow-moving, excess quantities and obsolescence, are stated at the lower
of cost (first-in, first-out basis) or market value. The Company’s estimate for excess and obsolete inventory is
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